Getting Money Out of China: The Reality Has Changed

Got a call the other day from a U.S. law firm that frequently uses our China lawyers to consult on litigation matters involving Chinese companies. The law firm was initially calling to see about our serving a Chinese defendant in a products liability action.

First thing we did was to tell them how until recently we had a 100% success rate in serving Chinese companies with process via the Hague Convention, but that our strong sense was that “the rules on that had changed.” We explained how China right now is making great efforts to prevent foreign currency from leaving the country and the possibility of a Chinese company losing a lawsuit outside China meant the possibility of foreign currency needing to leave China. And for that reason, we have over the last few months been encountering China service of process issues where none existed previously.

The above is just one of the many ways the rules of conducting business with China (legal business in the above instance) have changed due to China’s efforts to block or at least slow down a foreign currency exodus.

We first wrote about China’s newish foreign currency restrictions in Getting Money out of China: What the Heck is Going on? In that post (written on January 14), we wrote how “in the last week or so, our China lawyers have probably received more ‘money problem’ calls than in the year before that. And unlike most of these sorts of calls, the problems are brand new to us. It has reached the point that yesterday I told an American company (waiting for a large sum in investment funds to arrive from China) that two weeks ago I would have quickly told him that the Chinese company’s excuse for being unable to send the money was a ruse, but with all that has been going on lately, I have no idea whether that is the case or not.”

We then said that the common theme we were detecting was that “China banks seem to be doing whatever they can to avoid paying anyone in dollars.” We then listed how the following examples we were seeing and hearing about:

1. Chinese investors that have secured all necessary approvals to invest in American companies are not being allowed to actually make that investment. I mentioned this to a China attorney friend who says he has been hearing the same thing. Never heard this one until this month.

2. Chinese citizens who are supposed to be allowed to send up to $50,000 a year out of China, pretty much on questions asked, are not getting that money sent. I feel like every realtor in the United States has called us on this one. The Wall Street Journal wrote on this yesterday. Never heard this one until this month.

3. Money will not be sent to certain countries deemed at high risk for fake transactions unless there is conclusive proof that the transaction is real — in other words a lot more proof than required months ago. We heard this one last week regarding transactions with Indonesia, from a client with a subsidiary there. Never heard this one until this month.

4. Money will not be sent for certain types of transactions, especially services, which are often used to disguise moving money out of China illegally. This is not exactly new, but it appears China is cracking down on this. For what is ordinarily necessary to get money out of China for a services transaction, check out Want to Get Paid by a Chinese Company? Do These Three Things.

5. Get this one: Money will not be sent to any company on a services transaction unless that company can show that it does not have any Chinese owners. The alleged purpose behind this “rule” is again to prevent the sort of transactions ordinarily used to illegally move money out of China. Never heard this one until this month.

Much of that money was destined for hot West Coast real estate markets from Vancouver to Los Angeles. In Vancouver it’s debated whether President Xi Jinping’s government can stop the flood.

Seattle lawyer Dan Harris ­— an expert on facilitating trade with Chinese businesses — said that since January, China has aggressively clamped down on capital flight.

Harris said U.S. realtors are calling his firm more and more often for help in getting cash out of China for luxury home sales that were easily completed in the past.

“That will impact real estate in Vancouver and Seattle,” Harris said in an interview.

“If anyone thinks the Chinese government will not stop people from sending $3 million out to buy a house in Vancouver? Wow. I don’t know what they know that I don’t.”

Harris said Chinese companies seeking to invest in North American real estate started having trouble about three months ago as business transfers were examined more closely.

Yesterday, in Chinese Consumers Race to Buy Dollars as Yuan Slides [subscription is required, but the full article is here in the Australian Business Review] the Wall Street Journal wrote again on how China’s crackdown on foreign currency flows is impacting international business transactions. The article starts out by affirming exactly what our China lawyers have been hearing and been saying: that Beijing is telling China’s banks and others to slow down the foreign currency outflow. In other words, China’s laws on the books have not changed, but its on the ground reality has:

Chinese officials are trying anew to slow an unprecedented money exodus from the country, clamping down on individuals seeking to flee the yuan and making life tougher for companies that need to trade the currency for US dollars to do business.

China’s foreign-exchange regulator in recent months has deployed a new system to monitor individual purchases of foreign funds and has asked banks to reduce foreign-currency transactions.

It has summoned bankers to its offices to give guidance and has grilled them when foreign-exchange activity spikes, according to executives at Chinese and foreign lenders.

The article then provides the following examples of companies having troubles due to China’s foreign currency clampdown:

A European chemicals manufacturer (presumably its China WFOE) was delayed in obtaining US dollars in Shanghai, threatening its deadline for an overseas licensing payment.

The Bank of Tianjin is having trouble getting funds from mainland investors for a planned Hong Kong public stock offering.

A water-treatment company struggled to withdraw $US2000 ($2690) for an engineer to travel to the US.

A Chinese company was having problems wiring $US15 million to a Hong Kong company that for two years has been helping the Chinese company buy equipment for a South American factory.

This foreign currency clampdown is apparently working as “economists say tightened capital controls are one reason China’s foreign reserves fell only $US28.6 billion in February, less than a third the drops of the two previous months.”

The WSJ article ended with this fascinating/scary statistic:

“If 5 per cent of China’s 1.4 billion people used their full quotas [USD$50,000 in funds allowed to leave China each year], the $US3.5 trillion in foreign-currency demand would drain its ­[China’s] reserves.

China’s new restrictions on foreign currency outflows are literally changing the way our China attorneys practice law in the sense that we now account for this on any transaction that will involve money flowing from China to some other country. I do not want to get specific on what we are doing but I can say that we are now always looking at whether the money can come from somewhere other than China and, equally importantly, we are also always looking to write our contracts so as to minimize China currency blocking triggers.

Dan Harris is internationally regarded as a leading authority on legal matters related to doing business in China and in other emerging economies in Asia. Forbes Magazine, Business Week, Fortune Magazine, BBC News, The Wall Street Journal, The Washington Post, The Economist, CNBC, The New York Times, and many other major media players, have looked to him for his perspective on international law issues.

Thank you for rounding up all of the pieces of an emerging story in one place, Dan. What we’ve found at Rubicon Strategy Group when talking to Chinese institutional/conglomerate investors is that a part of the story is the lack of a unified FDI regulatory system in China. Once an investment is given the greenlight, there is little that Chinese regulators can do to monitor an investment – in most cases, they are completely blind. On top of that, protection for foreign investment, like certain types of foreign insurance is in its infancy stages. The strongest protection that the government has is the initial approval of an investment. In this scenario, where monitoring of an investment post-approval is difficult/impossible the logical conservative reaction by a regulator is to tell an institutional investor “No”, even if the investment being proposed is relatively safe. We’ve heard of this happening to one major Chinese conglomerate trying to vet a potential eight figure investment with MOFCOM. At Rubicon, to battle this bottleneck at the approval stage, and keeping in mind that we’ve entered this space in an unprecedented market downturn, what we’re attempting to do is create a built in monitoring mechanism into any potential deal between a Chinese institutional investor and an American investment target. We want to the Chinese investor to be able to show his regulator that not only do the numbers show an investment to be good, but the availability of a monitoring process will help the regulator keep an eye on the ongoing viability of the investment decision.

move it out first to a SE Asia country, Cambodia namely. It can easily be converted to USD virtually on the spot. Also, Cambodia does NOT share tax/banking info with other govs. including USA and the PRC.

Terry Newman

Eric are you saying there is no problem making large Rmb payments thru Chinese banks to Cambodian banks?

No. I’m not sure about that but I suspect less perhaps than say the U.S. as China is one of the biggest investors in Cambodia. What I’m saying is… the boarders are pretty open down south and there are “fuel services”.

594Reptilian

Cambodia, Thailand are not safe from Beijing’s intimidation. They are very reliant on Chinese tourism and investments, especially Cambodia. How long do you think would it take for Chinese regulators to realize Cambodia is one loophole they have to plug? And for Cambodian authorities to comply?

ASEAN will be a “chess board” of sorts between China and the U.S. In the end… no one likes China… especially ASEAN peoples. They’d much rather have “western”, Japanese and even Korean “partners” / guests. China’s hyped and faux “rise” is over now. Anyone who thought or still thinks there will be a “Chinese century” bought a big lie. They won’t even be a “super power”. Culturally… they are incapable of it.

One big reason I’ve been advocating Cambodia for sometime… and you can feel however you like about this is as you want to… but like I’ve said in laymen’s terms… “Cambodia virtually still has no tax system” OR… more technically speaking… “Cambodia to date, still has no DTA agreements (double taxation agreements)”.

Sectors Likely to Benefit:
foreign companies (say H.K. and/or Shanghai based) that sell goods or services (boutique hotel, F&Bs) through connections or staff present in Cambodia can stay out of the scope of Cambodian taxation and Taxation Back “home”.

Foreign construction companies on projects in Cambodia, will only be taxable in Cambodia under treaty rules if the project passes a certain time period.

Nope. We are not going to reveal any specific methods on how to get money out of China, because the best way(s) so much vary depending on the situation and because we do not want people employing these methods badly and thereby making it easier for the powers that be to spot and stop them. No-go. On this, our lips are going to be sealed.

Dan are you saying it doesn’t take a village to raise a mountain of cash and carry it across water? Or are you not saying something else?

Archie

More info Chris?

Foreign Devil

Is the author aware that a lot of these lawsuits against Chinese businesses from a foreign business are actually just an elaborate way to get a lot of money out of China? The Chinese business is actually suing himself with the help of some foreign lawyers to get his money out of China and into foreign real estate or investments. Oops. . should have read further before commenting! He does give this exact example.

I do hope this causes a crash in the Vancouver real estate market. Though not likely to happen. Would be satisfying to see Vancouver homes approach affordability for regular Canadians.

disqus_GhDMpgIzv1

Thanks Dan. Any thoughts on using RMB cross border cash pool as another alternative to move cash offshore? Although market sentiment appears to be that this is tightening up.

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